The
following item is a Letter of Intent of the government of Turkey, which describes
the policies that Turkey intends to implement in the context of its request for
financial support from the IMF. The document, which is the property of Turkey,
is being made available on the IMF website by agreement with the member as a service
to users of the IMF website.

1. Our Fund-supported economic program continues to deliver on its central objectives.

• Buoyed by the completion of the fifth review and our ongoing structural reforms, market confidence has markedly improved. Foreign reserves build-up has been higher than projected and net international reserves are now positive for the first time under the program. Treasury's borrowing terms have improved substantially, with benchmark government bond yields now at about 30 percent, reflecting increased demand for Turkish lira assets. On the international side, Turkish sovereign bond spreads have continued to decline relative to other emerging markets. Further reflecting improved investor confidence, our recent US$1.25 billion Eurobond issue was heavily oversubscribed.

• Real sector performance has also continued to strengthen. With cumulative inflation of less than 14 percent through end-September, our 20 percent end-year inflation target looks well within reach. With strong growth during the first half of the year, and several indicators, including industrial production, capacity utilization and exports, performing strongly, the program's 5 percent growth target may well be exceeded.

2. Strong policy implementation is playing an important role in delivering these gains.

• We met all monetary performance criteria and indicative targets for end-September. While the end-August performance criterion on the consolidated government sector primary balance was missed, the fiscal measures taken during the fifth review are now taking effect. To help ensure that the fiscal program is on track for the remainder of 2003, we have implemented an additional TL 0.8 quadrillion measures, mainly on the spending side. Draft legislation aimed at strengthening the effectiveness of BRSA has been submitted to Parliament but will not be passed by end-October. Therefore, the structural performance criterion regarding the Parliamentary passage of this legislation will be missed. But the legislation is expected to be passed shortly, certainly before Board consideration of the Sixth Review. We have also refrained from introducing any new amnesty on public receivables, in line with the new continuous performance criterion.

• As prior actions for the sixth review we expect that: (i) the Cabinet will approve the second phase of direct tax reform, which progressively transforms free trade zones into export processing zones in line with international best practice, and targets regional incentives at employment generation in lower income regions, and (ii) the Parliament will pass the Public Financial Management and Control (PFMC) Law, setting out a clear framework for budget preparation, execution, and control.

• On the structural reform side, while some 33,060 redundant positions have been eliminated since the beginning of 2002, the end-September targeted reduction in redundant SEE positions (some 19,400 positions since end-January this year) was missed by some 7,000 positions. However, 3,600 positions were eliminated in the first two weeks of October, including delayed reduction of redundant positions in TEKEL in preparation for privatization. In addition, by mid-October, 3,500 positions were eliminated in some SEEs in excess of their original target. We believe our progress should be assessed taking into account this overperformance, particularly as we are canceling these positions. We are also taking steps to reinvigorate the process and expect to meet the end-year target. We are submitting legislation to Parliament on an augmented, but time-limited, SEE redundancy package. This is expected to be passed shortly. We have also requested the World Bank to change the terms of their severance payment-support program so that the available financing could be utilized in preparation for, rather than after, privatization of SEEs.

3. To build on our success, we have formulated a strong macroeconomic framework and policy agenda for 2004. Our updated structural reform program is outlined in Annex A, with the new fiscal and monetary program set out in Annex B. To preserve our recent foreign reserves accumulation, we request that the end-December net international reserve floor for end-December 2003 be increased by US$4.0 billion. We also request that NIR floors be adjusted up by half of any amounts of U.S. financing drawn down under the recent US$8.5 billion loan agreement (see below), and, in light of the increase in demand for Turkish lira deposits, we ask that the end-December base money target be adjusted. Finally, to capture more accurately the primary surplus of the public sector, we ask to widen the coverage of the primary surplus performance criterion to include 27 SEEs, instead of 12, starting in 2004 (Annex D).

4. Against this backdrop, we request completion of the sixth review under the Stand-By Arrangement. Based on the remedial measures we have taken, we request a waiver for the nonobservance of the end-September 2003 performance criterion on reductions in SEE positions; a waiver of applicability for the end-October primary balance of the consolidated government sector, for which data will not become available until mid-December; and a waiver of non-observance of the structural performance criterion on Parliamentary passage of the legislation aimed at strengthening BRSA effectiveness. We will continue to consult the Fund about the progress being made in implementing policies supported by the Stand-By Arrangement, and in advance of any changes to these policies.

Macroeconomic framework

5. We are aiming for continued strong macroeconomic performance in 2004. Our determined implementation of the program and improved financial conditions should help deliver 5 percent real growth in 2004. We also believe that our monetary policy stance and supportive fiscal and incomes policies will further reduce inflation in line with next year's 12 percent target. The current account deficit is expected to stabilize in the period ahead as domestic demand and oil prices moderate and tourism recovers. Together with a strong capital account, helped by increased privatization-backed foreign investment and other private capital flows, this should maintain our net reserve position.

Fiscal policy

6. We remain fully committed to our primary surplus target of 6.5 percent of GNP to support debt reduction and increase the resilience of the economy.

• We fully expect to meet this year's remaining fiscal targets. In support of this aim, we have taken additional measures that will be reflected in the planned supplementary budget. These include revised expenditure ceilings reflecting currency-related gains on imported inputs, investment spending cuts, and some increase in excises that result in savings of TL 0.8 quadrillion.

• For 2004, we have submitted to Parliament our budget consistent with a primary surplus target of 5.0 percent of GNP in central government and are planning to maintain the primary surplus for the rest of the public sector at 1.5 percent of GNP. Our guiding principle in designing the 2004 budget has been to reduce the primary expenditure-to-GNP ratio in order to create room for elimination of some of the one-off measures that were put in place in 2003, introduce inflation-adjusted accounting, and reduce selected taxes on financial intermediation. In the draft 2004 central government budget, nominal expenditures are increased only in line with inflation, facilitating a decline of some ¾ percent of GNP in the expenditure ratio. Within this envelope, social spending relative to GNP has been protected.

• To facilitate achievement of our fiscal target, we have taken a number of measures. Special transaction and communication taxes and the PIT/CIT surcharge have been extended through next year; we are looking into ways of converting some of these taxes to more efficient and permanent sources of revenue. On the expenditure side, several measures have also been taken, including a continued hiring limit for civil servants, a hiring freeze for central government workers, and cuts in off-budget spending and the transfer of the associated special revenues to the budget.

7. We will also press ahead with our fiscal structural reform program. We observed key program conditions on direct tax reform and public financial control legislation, which will help lay the groundwork for improved medium-term fiscal performance (see above). In further support of this objective:

• We are taking steps to ensure that the next phase of social security reforms does not conflict with our broader fiscal goals. To this end, we will complete a detailed assessment of the fiscal implications of various options for social security reform by end-December 2003 (new structural benchmark). We will also introduce measures to offset any fiscal costs before the reforms are introduced.

• We will further improve the transparency of the public sector accounts. Building on the progress made when the "extrabudgetary funds" were brought on budget as special accounts, we will close these accounts, terminate special appropriations, and write over to the budget all special revenues. We will legislate these changes by the end of 2003 to take effect on January 1, 2005.

• Draft state enterprise governance legislation, for which Parliamentary passage is a structural benchmark for end-December 2003, is in the consultative process stage. A framework law, setting out the principles of public governance, and clarifying the division of labor between central agencies and local governments, consistent with the PFMC law is also being prepared.

• In order to broaden the tax base, we have requested technical assistance from the Fund to identify ways of bringing the informal economy into the tax net. Building on this work, we intend to upgrade our revenue collection through new tax administration reform legislation, which will be prepared by end-January and is expected to be passed by Parliament by end-March.

Monetary policy

8. The CBT's monetary policy will remain focused on achieving the inflation target—20 percent by the end of this year and 12 percent by the end of 2004. With all monetary program targets having been met through end-September, the appreciation of the Turkish lira and decline in inflation expectations have improved the prospects for meeting the inflation target. This has allowed us to steadily lower interest rates. In light of the recent increase in demand for Turkish lira deposits, we have adjusted our end-December base money targets. We have also extended our base money program through 2004, while the conditions for introducing formal inflation targeting are being put in place. As in previous years, program targets could be modified if there is strong evidence of a shift in base money demand.

9. We remain committed to the floating exchange rate regime. In light of the strength of the balance of payments and continuing reverse currency substitution, we have conducted foreign exchange purchase auctions, allowing us to exceed our end-September program target for net international reserves by more than US$7 billion. To consolidate these gains, we are raising the end-December NIR program target by US$4.0 billion, and setting new NIR targets for 2004. While we have intervened on a few occasions to dampen excessive exchange rate volatility, such discretionary intervention will continue to be strictly limited. Foreign exchange purchase auctions will continue to be adjusted in light of prospective foreign exchange supply.

Financing

10. We recently reached agreement with the U.S. authorities on a financial package totaling US$8.5 billion. The package, which has a grant element of US$1 billion, would be made available in four equal tranches at approximately six-monthly intervals. Our borrowing strategy for 2004 does not depend on the availability of these funds. However, should we draw on this financing, we would use it for debt reduction. This would also enable us to raise our deposit buffer at the CBT, one for one above our current projection, and to build up our net international reserves. If we were to draw down the deposit buffer later, we would use it, at least for the first tranche, to repay debt denominated in foreign currency. This approach could then be revisited in future reviews.

Financial sector reform

11. We are pressing ahead with our reforms to strengthen the banking system. The independence of the Banking Regulation and Supervision Agency (BRSA) is being strengthened, progress is being made in resolving Pamuk bank and asset sales are proceeding as planned. We intend to phase out some financial transaction taxes to further promote intermediation. We have also started to implement an action plan to compensate eligible depositors at Imar bank.

12. The BRSA's independence is being strengthened. We have submitted to parliament legal amendments expediting court cases involving the BRSA (performance criterion) and expect that the proposed legislation will be passed shortly . These amendments include: (i) setting up a chamber at the State Council that will specialize in cases against independent regulatory institutions, including the BRSA; (ii) accelerating the consideration of administrative lawsuits against the BRSA by introducing strict deadlines; and (iii) informing the BRSA about temporary injunction appeals and holding preliminary hearings before final decisions are taken. To help preserve the BRSA's independence, we have also provided for the direct submission of the BRSA budget to parliament under the new PFMC Law covering independent agencies. In the same vein, we are working on a new Framework Law for independent agencies (including the BRSA) consistent with the PFMC Law.

13. The oversight committee for Yapi Kredi has published its first report. This report confirms that the bank has continued to restore its balance sheet by selling off fixed assets and equity participations.

14. The Pamukbank sales process will be brought to a close before end-December 2003. The preferred option is to sell the bank while any remaining assets and liabilities will be transferred to the bridge bank, Bayindirbank. If the sales process cannot be completed, Pamukbank will be resolved by merger or liquidation. The Treasury will issue the necessary government securities to facilitate the resolution strategy.

15. We have started to implement a plan for compensating eligible depositors at Imar bank.

• Under the plan eligible depositors will be protected. Deposits with a value of about US$6 billion backed by matching securities will be transferred to Ziraat. Eligible depositors will be compensated with upfront cash payments in amounts up to TL 10 billion and given passbooks for remaining deposit amounts. These passbook deposits will be repaid according to a preannounced time schedule.

• We are also committed to a detailed follow-up inquiry on Imar. We will conduct an investigation into Imar's losses and are committed to make available whatever resources are needed to maximize recoveries to help lower the burden to the public sector. At the request of the BRSA, anindependentinquiry is being launched into lessons to be learned from the Imar case and how to strengthen the supervisory framework, external bank audits and other relevant agencies involved in supervising financial markets. The findings will be used to help strengthen supervisory functions, and the report will be published by end-May 2004.

16. Preparations for the sale of Vakif are progressing. We will initiate two due diligence tests of Vakif to determine its financial condition and market value, to be completed by end-February 2004. Based on the outcome of this exercise, a decision will be made within one month of the completion of the due diligence test on the method of sale of the shares held by the General Directorate of Foundations.

17. The privatization of Ziraat and Halk is being delayed until a decision has been made on the resolution of Pamuk and Vakif. The Sworn Bank Auditors have confirmed that lending procedures in the state banks during the first six months of this year were based on commercial principles.

18. Financial transaction taxes will be further lowered to support bank intermediation. Selected stamp duties will be abolished from January 1, 2004. We also intend to reduce other intermediation taxes, including the Resource Utilization Support Fund levy and the Banking and Insurance Transaction tax, but in a phased and gradual manner.

19. We are also taking other necessary measures to reform the banking system and to strengthen the supervisory framework: (i) we will submit legislation to Parliament enabling the transfer of the regulation and supervision of nonbank credit institutions from the Treasury to the BRSA, effective January 1, 2004; and (ii) a portfolio of SDIF assets with a face value of US$330 million has been put up for sale, with final bids to be submitted by December 8, 2003.

Enhancing the role of the private sector

20. To further increase the role of the private sector in the economy, we expect to complete soon the privatization of key SEEs. Despite some technical setbacks in the privatization program, we plan to finalize the privatization of TUPRAŞ and TEKEL by end-2003 and of PETKIM in early 2004. Despite cash privatization proceeds of only US$144 million so far this year—meaning that the end-September indicative target on privatization proceeds was not observed—we believe that the end-year privatization receipts target of US$2.1 billion remains within reach. We have prepared the privatization strategy for Türk Telekom, which the Council of Ministers is expected to adopt shortly (structural benchmark). Next year we are committed to proceeding with the privatization of Türk ŞEKER, Turkish Airlines, the National Lottery and other state-owned enterprises. We expect cash revenues from privatization to reach US$3 billion in 2004.

21. We are also continuing to improve the business climate in Turkey. To promote Turkey as a foreign direct investment destination, legislation establishing the Investment Promotion Agency has been prepared and is expected to be considered by Parliament in early 2004. The inaugural Investor Advisory Council meeting is planned to be held in Spring 2004. In further support of the business climate, we have prepared draft legislation establishing a code of conduct for civil servants and public administrators, and intend to submit it to parliament shortly for passage by end-2003 (structural benchmark).

1/ The December 31, 2003 test date ceilings for the primary balance and external debt performance criteria become applicable for purchases 45 days after the actual test date in view of the time required to report comprehensive monitoring data.

Primary Balance of the Consolidated Government Sector

Table 1. Turkey: Performance Criteria and Indicative Targets
on the Cumulative
Primary Balance of the Consolidated Government Sector

Floor(In trillions of Turkish lira)

Cumulative primary balance from January 1, 2003, to:

September, 30 2003 (indicative)

20,580

October 31, 2003 (performance criterion)

21,490

November 30, 2003 (indicative)

24,190

December, 31 2003 (performance criterion)

22,900

Cumulative primary balance from January 1, 2004, to:

March 31, 2004 (performance criterion)

5,420

December 31, 2004 (indicative target)

26,200

1. The primary balance of the consolidated government sector (CGS),Table 1, comprises the primary balances (primary revenue minus noninterest expenditures) of the consolidated central government (consolidated budget), the 3 extra budgetary funds (EBFs) identified below, the 12 state economic enterprises (SEEs) identified below, the social security institutions (SSIs), and the unemployment insurance fund. Starting in 2004 the SEEs definition will be expanded to 27 as listed in paragraph six. The floors on the primary balance of the CGS will be monitored:

• For the central government from above the line on a modified cash basis (including both special revenues and special expenditures). In this definition, reported transfers to social security institutions are reconciled with cash transfers reported by the social security institutions.

• For the EBFs, SSIs, and the unemployment insurance fund from above the line on a cash basis;

• For the SEEs, from below the line as described in paragraph 6.

2. For the purposes of the program, the primary revenues will exclude interest receipts of the consolidated central government (including on tax arrears), SEEs, and of the unemployment insurance fund, profit transfers of the Central Bank of Turkey (CBT) and proceeds from the sale of assets of the CGS (privatization proceeds or transfers thereof). Revenues of the CGS from sales of immovables below TL 500 trillion will be included. Interest receipts of EBFs and SSIs will not be excluded. As well, the floor on the primary balance will be adjusted upwards for any increase in revenues arising from changes in the revenue sharing agreement between any components of the CGS and other elements of the public sector, including local authorities. For the purposes of the program, revenues of the CGS will exclude payments-in-kind and other nonmonetary forms of payments.

3. For the purposes of the program, primary expenditure of the CGS will exclude any payments related to bank recapitalization and to the restructuring of private and state banks. It will also exclude severance payments made to retire or retrench redundant public workers in state enterprises, net of projected wage savings during 2003 from this retrenchment, up to a cap of TL 500 trillion (above which they would count towards the target). Projected wage savings are defined as the employees' salary and bonuses for the remainder of the year less the pension to be received (from the point of retrenchment). Redundant workers are defined by company by the exercise completed in May 2002, and total 45,792 for all companies.

4. Net lending of any component of the CGS will be considered as a non-interest expenditure item. Payment of guaranteed debt by treasury on behalf of non-CGS components of the public sector will not be treated as net lending up to the baseline reported in Annex F.

Extra budgetary funds

5. The three EBFs included in the definition of the performance criterion for 2003 are: the defense fund, the privatization fund, and the social aid fund. The balance of the promotion fund—which does not have the legal authority to borrow, and will not be given such authority during the duration of the stand-by arrangement—is excluded from the definition of the performance criterion.

7. The primary balance of these SEEs will be monitored as the sum of net financing minus accrued interest made by the SEEs. Net financing will be monitored as: net financing from the banking system (excluding pre-export financing from the Eximbank) plus net external borrowing (excluding normal trade financing), plus the change in net arrears to and net advances from the private sector and to/from the non-CGS public sector (including subsidiaries and joint ventures), plus net interest payments undertaken by the Treasury. The net change in arrears on tax liabilities will be excluded.

8. Net financing from the banking system (excluding pre-export financing from the Eximbank) is defined as the change in all claims of these institutions on the SEEs listed above, including loans and capitalized interest arrears, less the change in deposits and repos of SEEs in these institutions, as reported by these SEEs. Changes in claims and deposits denominated in foreign currency will be valued at the average of the exchange rates between the Turkish lira and each corresponding currency prevailing during the quarter in question. As of December 31, 2002 the stock of net banking claims on SEEs as defined above stood at TL 92 trillion, valued at the exchange rates on that day.

9. Net external borrowing is defined as the receipt of external loans (including guaranteed debt and on-lending, and excluding normal trade financing) less amortization (excluding repayments of guaranteed debt and on-lending undertaken by the Treasury), valued at the exchange rate at the time of transaction. As of December 31, 2002 the stock of external loans stood at TL 11,200 trillion, valued at the exchange rates on that day.

Social security institutions

10. The deficits of the social security institutions (SSIs) will be covered by transfers from the central government budget, and they are thus expected to be in primary balance in 2003.

Adjusters

11. The floor on the primary surplus of the CGS will be adjusted upwards for any increase in the expenditure arrears of the SSIs. Arrears of the SSIs are defined as the sum of (i) overdue pension payments; (ii) medicine payments overdue by more than 30 days (from the date of invoice receipt); and (iii) other payments overdue by more than 30 days (from the date of invoice receipt). In the case of Bag Kur they exclude arrears to the common retirement fund. The stock of arrears for Bag Kur stood at TL 296 trillion; for SSK stood at TL 314 trillion; and for ES stood at TL 0 trillion on December 31, 2002. These stocks of arrears will be used for the purpose of calculating the adjustor in 2004.

12. The floors for the primary surplus will be adjusted upward:

• for any issue of noncash debt other than for bank recapitalization and securitization of duty losses and for the restructuring of the Agricultural Sale Cooperative Units and military foreign financed in-kind spending;

• for any lower-than-programmed Direct Income Support as of December 31, 2003 (payments during 2003 are programmed as TL 2,310 trillion); and for lower-than-programmed Direct Income Support as of December 31, 2004 (payments during 2004 are programmed at TL 3 quadrillion).

• for any off-balance sheet expenditure of any component of the CGS (excluding military foreign financed in-kind spending).

13. The floor on the primary surplus will be adjusted upwards (downwards) in line with the projected surplus (deficit) of the primary balance of any fund or entity that is incorporated in the CGS after January, 1 2003.

1. The overall balance of the consolidated government sector (CGS), Table 1, comprises (i) the primary balance of the CGS as defined in Annex D, (ii) the net interest payments of the central government, the UIF, and the SEEs, (iii) the interest payments of SSIs and EBFs, and (iv) the profit transfers from the CBT to the consolidated central government.

2. The monitoring of the different components of the overall balance will be as indicated in paragraph 1 of Annex D.

3. All definitions and adjusters specified in Annex D to apply to the primary balance of the CGS will also apply to the overall balance of the CGS. In particular, the overall balance will be adjusted for the overall balance of any new government funds and institutions established after January 1, 2003.

1. Net lending (risk account) by Treasury to other (non-CGS) components of the public sector is defined as the sum of guarantee payments made by Treasury on behalf of these entities minus repayments obtained by Treasury from them.

2. Other components of the public sector include: extrabudgetary funds not in the CGS, revolving funds, associations or foundations, state economic enterprises not in the CGS, state banks (including Eximbank and Iller bank), special provincial administrations, municipalities, municipal enterprises, build-operate-transfer projects, and build-operate projects.

3. Repayments include those obtained in cash directly from municipalities. Repayments, obtained through claw-back mechanisms, either directly, by withholding of transfers of tax shares from the MoF, or indirectly, via withholding of transfers to be made by Iller Bank, and proceeds from privatization, direct or indirect, are not included as repayments.

4. For the purposes of program monitoring, the flows in U.S. dollars will be converted at the average TL/US$ exchange rate between test dates.

1/ These ceilings are based on the average of the stocks prevailing during the five working days including and immediately preceding each of these dates.

1. This Annex sets out performance criteria for base money, and indicative targets for net domestic assets of the Central Bank of Turkey (CBT) and Treasury combined.

2. Base money is defined as currency issued by the CBT, plus the banking sector's deposits in Turkish lira with the CBT. The net domestic assets (NDA) of the CBT are defined as base money less net foreign assets of the CBT. The net domestic assets of the CBT and Treasury combined are defined as net domestic assets of the CBT plus (i) Treasury liabilities to the International Monetary Fund and (ii) Treasury foreign exchange denominated borrowing with an original maturity of less than one year.

3. Net foreign assets of the CBT are defined as the sum of the net international reserves of the CBT (as defined in Annex H), medium- and long-term foreign exchange credits (net), and other net foreign assets (including deposits under the Dresdner scheme of original maturity of two years or longer and the holdings in accounts of the Turkish Defense Fund, but excluding CBT's net lending to domestic banks in foreign exchange). As of December 31, 2002, net foreign assets of the CBT amounted to TL 3.93 quadrillion, net domestic assets of the CBT TL 6.50 quadrillion, and base money TL 10.43 quadrillion.

4. Net domestic assets of the Treasury are equal to treasury liabilities to the International Monetary Fund and treasury foreign exchange denominated borrowing with an original maturity of less than one year. As of December 31, 2002, these amounted to US$14.66 billion, or TL 21.10 quadrillion (evaluated at program exchange rates).

5. All assets and liabilities denominated in foreign currencies will be converted into Turkish lira at program exchange rates (Annex I).

6. NDA ceilings will be adjusted for any change in the definition of the aggregate to which the reserve requirement applies according to the following formula:

Δ NDA = R*ΔB,

where: R denotes the 6 percent reserve requirement and ΔB denotes the change in base generated by a change in the definition of the reserve aggregate, or due to any change in the averaging period.

7. NDA ceilings will be adjusted for any change in the reserve requirement coefficient according to the following formula:

ΔNDA = B * ΔR

where: B is the level of the base to which the reserve requirement applies on the test date and ΔR is the change in the reserve requirement coefficient and the liquidity requirement coefficient.

8. The NDA ceilings will be adjusted downward for any waiver of reserve requirements for any additional bank intervened by the BRSA. The adjustment will be equal to the existing reserve requirement coefficient times the amount of liabilities at these banks subject to reserve requirements.

Table 2. Turkey: Indicative Targets on the Net Domestic Assets of the Central Bank of Turkey and Treasury Combined

(In quadrillions of Turkish lira) 1/

Ceilings

Actual

Outstanding NDA as of December 31, 2002:

33.1

28.6

April 30, 2003

32.8

31.0

June 30, 2003

34.1

29.4

September 30, 2003

33.8

23.0

December 31, 2003

28.4

...

March 31, 2004

29.6

...

December 31, 2004

31.8

...

1/ These targets are based on the average of the stocks prevailing during the five working days including and immediately preceding each of these dates.

1. For program purposes, net international reserves is defined as net international reserves of the CBT minus (i) Treasury liabilities to the International Monetary Fund and (ii) Treasury foreign exchange denominated borrowing with an original maturity of less than one year.

2. The floor on the level of net international reserves as specified in Table 1 will be adjusted upwards in the amount of one half of the cumulative loan disbursements under the United States-Turkey Financial Agreement of September 2003.

3. Net international reserves of the Central Bank of Turkey (CBT) comprise its gross foreign assets excluding encumbered reserves less its gross international reserve liabilities plus the net forward position of the central bank, denominated in U.S. dollars. Encumbered reserves are reserves that are not readily available.

4. For the purpose of the program, gross foreign assets are all short-term foreign (convertible) currency denominated claims on nonresidents, monetary gold valued at the December 31, 2001 average London fixing market price of US$276.5 per troy ounce, foreign bank notes, balances in correspondent accounts, and any reserve position in the IMF. At present encumbered reserves consist of foreign asset holdings in accounts of the Turkish Defense Fund (amounting to US$0.426 billion on December 31, 2002). The special Dresdner portfolio (amounting to US$0.771 billion on December 31, 2002) is also encumbered, but is not subtracted from foreign reserves given the overlap with one-year foreign currency denominated liabilities (see below). Reserve assets as of December 31, 2002 amounted to US$25.79 billion (evaluated at program exchange rates).

5. Gross international reserve liabilities include all foreign currency-denominated liabilities (or TL-denominated liabilities indexed to any exchange rate) to residents and non-residents with an original maturity of up to and including one year (including reserves against foreign currency deposits of the banking sector), claims from central bank letters of credit, overdraft obligations of the central bank, and central bank liabilities arising from balance of payments support borrowing irrespective of their maturity. Government foreign exchange deposits with the CBT are not treated as an international reserve liability. On December 31, 2002 reserve liabilities thus defined amounted to US$15.75 billion (evaluated at program exchange rates).

5. The net forward position is defined as the difference between the face value of foreign currency-denominated or indexed central bank off-balance sheet (forwards, swaps, options on foreign currency, and any future contracts) claims on nonresidents and foreign currency obligations to both residents and nonresidents. As of December 31, 2002 these amounts were zero.

6. As of December 31, 2002 the sum of: (i) Treasury liabilities to the International Monetary Fund and (ii) Treasury foreign exchange denominated borrowing with an original maturity of less than one year amounted to US$14.66 billion.

7. All assets and liabilities denominated in foreign currencies other than the U.S. dollar will be converted into U.S. dollars at the program cross exchange rates specified (Annex I).

1. This table sets out the program exchange rates referred to in earlier Annexes. They shall apply to the performance criteria/indicative ceilings or floors for the period December 31, 2001-December 31, 2004. Currencies not specified here will be converted at the representative exchange rates reported to the IMF as of December 31, 2001.

2. Constituent currencies of the euro shall be converted into euro at the official European Union conversion rates and then converted into the U.S. dollar value.

Table 1. Turkey: Indicative Target on Cumulative PrivatizationProceeds of the Consolidated Government Sector

Floor
(In millions of U.S. dollars)

Cumulative privatization proceeds from end-December 2002 to:

March 31, 2003

30

June 30, 2003

90

September 30, 2003

790

December 31, 2003

2,100

March 31, 2004

2,200

June 30, 2004

2,600

September 30, 2004

3,100

December 31, 2004

5,100

1. The consolidated government sector is defined in Annex D above.

2. Privatization proceeds are measured in cash terms, except in the case of conversion of an exchangeable bond (proceeds exclude amounts realized from the sale of convertible bonds).

3. Privatization proceeds exclude sales of immovables and movables, and any other items already captured in the performance criteria for the consolidated public sector (see Annex D, referenced above).

4. Privatization proceeds exclude any sale of assets to entities in the consolidated government sector, to the local governments, or to state economic enterprises not captured in the program definition of the consolidated government sector.

1. The limits specified in Table 1 apply to the stock of debt of original maturity of one year or less, owed or guaranteed by the consolidated government sector (as defined in Annex D). The term "debt" has the meaning set forth in point No. 9 of the Guidelines on Performance Criteria with Respect to External Debt or Borrowing in Fund Arrangements (Decision No. 6230-(79/140), August 3, 1979 as amended by Decision Nos. 11096-(95/100), October 25, 1995, and 12274-(00/85), August 24, 2000). Excluded from this performance criterion are external program financing, sales of treasury bills denominated in Turkish lira or foreign exchange to nonresidents in either the domestic primary market or the secondary market, normal import-related credits, reserve liabilities of the Central Bank of Turkey, and forward contracts, swaps, and other future market contracts. Debt falling within the limit shall be valued in U.S. dollars at the program cross exchange rates specified in Annex I.

1. The limits specified in Table 1 apply to the contracting or guaranteeing by the consolidated government sector (as defined in Annex D) of new, nonconcessional external debt with an original maturity of more than one year. This performance criterion applies not only to debt as defined in point No. 9 of the Guidelines on Performance Criteria with Respect to Foreign Debt (adopted by the Executive Board of the International Monetary Fund on August 24, 2000) but also to commitments contracted or guaranteed for which value has not been received. The term "nonconcessional" means containing a grant element of less than 35 percent on the basis of the currency-specific discount rates based on the OECD commercial interest reference rates in place at the time at which the contract is entered into, or guarantee issued. Excluded from this performance criterion are credits extended by the IMF, adjustment lending from the World Bank, and other external program financing, long-term liabilities of the Central Bank of Turkey and sales of treasury bills and bonds denominated in TL or FX to nonresidents in either the domestic primary market or the secondary market. Debt falling within the limit shall be valued in U.S. dollars at the exchange rate prevailing at the time the contract is entered into, or guarantee is issued.